Exchange Rates and Public Opinion on the European Single Currency
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Is My Crown Better than Your Euro? Exchange Rates and Public Opinion on the European Single Currency SARA BINZER HOBOLT Department of Politics and International Relations University of Oxford [email protected] PATRICK LEBLOND Department of International Business HEC Montreal [email protected] Draft Paper. Comments most welcome. Please do not cite without permission from authors. Paper presented at the European Union Studies Association (EUSA) Tenth Biennial International Conference, Montreal, Canada * May 17-May 19, 2007 ∗ Abstract The No to the euro in referendums in Denmark and Sweden has been characterized as a public rebellion against an elite project and a sign of a general Euroscepticism among the citizens. However, it is often ignored that support for the euro fluctuates significantly over time in these countries, and hence analysing referendum outcomes simply in terms on static factors will provide only part of the explanation. In contrast to existing studies, this paper provides an analysis of the short-term dynamics in public support for the euro in the period leading up to the referendums. We thus address the question of why public attitudes towards monetary integration vary over time. We argue that at least part of the answer can be found in exchange rate fluctuations. Existing studies have neglected the fact that the national currency is not only a purely monetary indicator, but also carries symbolic weight. The public is therefore less likely to surrender their national currency when it is strong than when it is weak. They are also less willing to accept a replacement currency (e.g. the euro) when it is seen as weak vis-à-vis other world currencies. Our analysis of the two euro campaigns lends credence to our proposition that exchange rates matter. Moreover, we test impact of exchange rate changes on support of the euro using time series analysis. We find that the rapid fall in the value of the euro vis-à-vis the dollar contributed to the Danish rejection of the euro, whereas the strength of the Swedish currency made the Swedes more reluctant to relinquish their crown. ∗ The authors would like to thank Jonathan Beauchesne for his helpful research assistance. We are also grateful to Robert Klemmensen for providing us with Danish government support data. 1 Introduction The decline in the value of the euro against the dollar was the single most important reason why we lost the referendum. 1 (Henrik Dam Kristensen, director of the Danish government’s euro referendum campaign) In a world where the flows of goods, services, capital and, to a lesser extent, people are becoming increasingly global, the leaders of states with small, open economies are questioning themselves as to whether it would not be better economically to adopt a global currency like the US dollar or, now, the euro. In democratic countries, such a decision is unlikely to be taken lightly given the important role that the national currency normally plays as a symbol of people’s identification with the state (Helleiner 2003). Where the government decides that it would be best to replace the national currency with another, more global currency, some form of public consultation will be required in order to legitimise such a politically salient decision. In many cases, this public consultation will take the form of a referendum. This is what happened in Denmark in September 2000 and in Sweden in September 2003. The issue for the government is not only to understand the economic costs and benefits of adopting another currency but also to gain the support of a majority of the population for such a decision. It is, therefore, crucial to be aware of the factors that influence public opinion on monetary integration. Fortunately, there is a small but growing literature on the topic as a result of the introduction of the euro in the European Union (EU) in January 1999. It has focused its attention at both aggregate and individual level determinants of support for the European single currency. However, most of these studies have taken a static view of public opinion on the euro, analysing surveys at a given point in time and, hence, neglecting the dynamics of popular sentiments over time. Static analyses may be best to identify structural (or slow-changing) factors affecting people’s opinion vis-à-vis the euro’s adoption but they cannot take into account those factors that influence the evolution of public opinion on shorter time frames (e.g., over months rather than years). The short-term dynamics of popular support for monetary integration are important for a government 1 Interview by Hobolt with Henrik Dam Kristensen, Copenhagen, January 2004. All interview and newspaper quotes are translated by the authors. 2 that thinks adopting the euro (or the dollar) is the best decision for the country’s economy. As such, these short-term factors will be determinant in deciding the timing of a popular consultation. One such factor that, surprisingly, has received little attention in the literature is the exchange rate. Most (static) studies speak of the importance of people’s national identity vs. their European one in determining the level of support for the European single currency. However, they neglect the fact that the national currency is also a symbol of the country’s identity. The question, then, is whether the symbolic value that people attach to the national currency is stable or variable over time. If the latter, then we need to understand what causes this fluctuation in value. We would argue that the strength of a currency, as measured by its exchange rate, is the most important measure of its symbolic value. Anecdotal evidence supports this view. In Canada, for example, support for adopting a common currency with the United States increases when the Canadian dollar depreciates vis-à-vis the US dollar and vice versa when it appreciates (Leblond 2003). In Italy, in spite of a certain degree of attachment to their national currency, Italians were quite happy to replace their devalued lira with a potentially strong and stable euro governed by an independent European Central Bank. On the other hand, Germans were reluctant to give up their Deutsche Mark (DM) for the euro since it had come to represent the symbol of Germany’s post-war stability and prosperity (Risse 2003). Thus, the implication is that a currency’s exchange rate –in both the short and long term – should be an important determinant of public opinion vis-à-vis monetary integration. The present paper aims to validate the above-mentioned proposition regarding the importance of the exchange rate as a determinant of public opinion on monetary integration, i.e. replacing the national currency with another currency, whether common (e.g., the euro) or foreign (e.g., the US dollar). For this purpose, it analyses the cases of Denmark and Sweden after the introduction of the euro in January 1999. In opposition to existing studies – which are mostly static single-case or cross- national analyses – our focus is on the short-term dynamics of public opinion support for the euro in Denmark and Sweden, separately. This way, we are able to clearly show how the exchange rate is a key factor in explaining short-term fluctuations in people’s sentiments vis-à-vis their country’s membership in the Eurozone. Interestingly, the role of the exchange rate in influencing Danes’ and Swedes’ opinion 3 on replacing their crown differs, 2 where the former focus on the euro’s exchange rate with the US dollar whereas the latter focus on the krona’s exchange rate with the euro. This is a result of the two countries adopting different monetary policy and exchange rate regimes (see also Jupille and Leblang 2007). The paper is organised as follows. The first section reviews the existing literature on referendum choices and support for Europe’s single currency. The second section presents our theoretical expectations regarding the relationship between exchange rates and public opinion in Denmark and Sweden. The third section describes the euro referendum campaigns in both Denmark and Sweden in order to show that the exchange rate was indeed a salient issue. The fourth section presents the data and methodology for testing the importance of the exchange rate for public opinion on adopting the euro while the fifth section discusses the results of the statistical analysis. The last section concludes on the importance that the exchange rate plays as a determinant of people’s support for monetary integration. Explaining referendum choices and support for the euro Most studies of vote choices in European referendums have focused on the individual- level predictors of voting behaviour, rather than the dynamics of opinion formation over time. These individual-level approaches to voting behaviour in EU referendums can be divided into three schools: the ‘community’ explanation, the ‘second-order election’ school and the ‘utilitarian expectations’ school (see Garry, Marsh and Sinnott 2005; Hobolt 2006). The first school focuses on individuals’ values and beliefs, and argues that voting behaviour in EU referendums reflects people’s underlying broad attitudes towards European integration. This ‘community’ approach, therefore suggests that it is primarily voters’ general fear about loss of sovereignty and national identity in a United States of Europe that drive voting in referendums (Siune et al. 1994a, 1994b; Svensson 1994, 2002). Another competing explanation of voting behaviour in EU referendums is inspired by the ‘second-order’ theory of elections (Reif and Schmitt 1980). The important characteristic of 'second-order' elections (local and regional 2 Denmark’s currency is called the krone while Sweden’s is called the krona . Both names mean crown in English.